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Category Archives: Public Economics

Governments have long been competing for investment, and one obvious way of doing that is offering advantegous tax rates to corporations.

As Keller and Schranz (2013) point out, however, tax rates are but one component of a whole package known as “tax attractiveness”. The authors develop an index of tax attractiveness based on 16 indicators, which proves that even countries with relatively high tax rates can adopt policies that make them competitive.

Universal service obligation (USO) refers to the situation in which an incumbent must provide the same service to all consumers in a market at the same price. Examples include postal services or even health insurance.

The problem is of course that there are consumers in the market who are expensive to serve. This includes inhabiants of rural towns for a postal company or people with pre-existing conditions for a health insurance company. If the government doesn’t want anyone in the country to have no access to the service, it can require the supplier(s) to give the same service to everyone at the same price, this is universal service obligation.

When Mitt Romney’s effective tax rate was released, the common reaction was that this is preposterous and that capital gains taxes should be increased. This is an arguably understandable reaction. However, this post shows that basing such decisions as whether a tax should be increased on intuition or gut feelings can lead to the wrong conclusions.

As it turns out, in many cases the effects of a tax spread across the economy and determining who is actually impacted by it may need some more careful analysis. This post shows what the effect of a capital gains tax really is and who is really affected by them.

An interesting paper by Chetty, Looney and Kroft (2008) looks at tax incidence with salience. What this means is that in standard economic theory the economic incidence (i.e. who will bear the tax burden) does not depend on whether a tax is levied on consumers or producers. Matter of fact, the only thing that determines economic incidence is the relative price elasticities of demand and supply.

However, a key assumption for this is that consumers always incorporate the tax into their decision-making. As the paper mentioned above shows, this may not always be the case.